‘Shark Tank’ Contract Can Bite Entrepreneurs

When Idaho entrepreneur Scott Jordan pitched his business to a group of well-heeled investors on ABC’s “Shark Tank” last season, he didn’t reach a deal with Mark Cuban or any of the other TV deal-makers.

But even without a cash infusion from any of the so-called sharks, he walked away knowing that producers and the network in the future could take a bite out of his company, Technology Enabled Clothing.

Buried in Jordan's contract is a clause that gives the show’s producers the option to take an equity stake in his company or to claim a share of all future profits. All contestants apparently must sign such an agreement in exchange for appearing on the show. According to one contract posted online, the contestant faced giving up a 5 percent equity share of the business or 2 percent of operating profits in perpetuity.

For the producers – Sony Pictures Television Inc. and an affiliate of reality producer Mark Burnett’s One Three Media, as well as Walt Disney Co.’s ABC network – taking a stake in a business offers no risk while presenting an opportunity to defray some costs. Fox’s “American Idol,” for example, requires its finalists to agree to certain recording and merchandising deals.

But some question the ethics of a successful TV show taking a piece of a contestant’s business. “It doesn’t pass the smell test. It seems very odd,” said Lawrence Wenner, a professor of communications and ethics at Loyola Marymount University.

Producers and the network did not comment expansively on the arrangement.

However, Rick Stone, an entertainment attorney and partner at Jenner & Block in Los Angeles, said that while the arrangement might be unusual, it doesn’t strike him as inappropriate.

“It’s driven by the unusual format, where you have people with proposed businesses (and ABC is giving) massive free exposure that no other business could get,” he said.

Read the full story in this week's edition of the Los Angeles Business Journal (subscription required).